The U.S. stock market is wrapping up 2013 with solid bullish momentum. We are still in what I’ve called a “plow horse economy.” The forward progress may not always look impressive, but it adds up to recovery.
Last week the Federal Reserve began the long awaited “taper” of its QE3 stimulus program. Outgoing Fed chair Ben Bernanke, new chair nominee (and current vice chair) Janet Yellen and other monetary policy makers agreed the economy is on track towards sustainable growth next year.
Reports released after the Fed’s action support their view. Last Friday the Commerce Department revised its third quarter economic growth estimate up to a 4.1% annualized pace. Earlier estimates looked more like inventory build-up, but now the data show a healthier mix of consumer spending and business investment.
More to the point for investors, the latest report nudged corporate profit forecasts a little higher. Hiring activity is also picking up as employers add production capacity. Housing prices are also on an upward path, even as new construction activity increases in many regions. This should boost consumer spending and help the plow horse trot along even faster.
The Fed’s statutory mandate is to encourage growth without sparking inflation. Right now, they are keeping the two forces nicely balanced. Overall inflation is low, thanks to stable to declining fuel prices. Production from U.S. and Canadian shale deposits is growing fast as additional infrastructure comes online. The falling energy prices offset inflationary pressure from housing, transportation and health care expenses.
Financial markets anticipated all this months ago. The colder months tend to be bullish most years, and they look especially so this time. The Dow Jones Industrial Average and S&P 500 both touched new all-time highs repeatedly over the last few weeks. The benchmarks remain on an upward path as we approach year-end.
The economy still faces challenges. For example, unexpected geopolitical events could potentially drive energy prices up very quickly. This would call the mild inflation forecasts into question. In Washington, Congress needs to reach another debt ceiling compromise by early February. The Fed’s reduced QE3 bond purchases could push up mortgage rates and cut into housing affordability.
Those are all serious question marks, but we never have full certainty about the future. Surprises aren’t always bad, either. Many corporations will announce quarterly and annual results in January. A few will disappoint, but others will likely turn out better than expected.
Is a plow horse economy exciting? Usually not, but what counts are the results. The market is still rewarding investors who are willing to take a risk. We think it will keep doing so in early 2014.
Disclosure: This commentary is presented only to provide general information on our company and our investment strategies. The material contains the current opinion of Republic Wealth Advisors (KCM) as of the date of creation which are subject to change without notice. The information contained herein does not constitutes an offer to sell (nor the solicitation of an offer to buy) any security. Statements concerning financial market trends are based on current market conditions which will fluctuate. Past performance is not indicative of future results.